JOURNAL
AMERICAN
BANKRUPTCY
INSTITUTE
Issues and Information for Today’s Busy Insolvency Professional
Stranger in Paradise? The Role of a Foreign
Bankruptcy Trustee in Chapter 15
Written by:
Kenneth H. Brown
Pachulski Stang Ziehl & Jones LLP
San Francisco
kbrown@pszyjw.com
Barry A. Sullivan
Bickerton Lee Dang & Sullivan; Honolulu
sullivan@bsds.com
Leonard A. Budyonny
Bickerton Lee Dang & Sullivan; Honolulu1
budyonny@bsds.com
A
common but erroneous assumption among cross-border insolvency professionals and distressed-asset investors is that the U.S.based assets of a foreign debtor are
subject to judicial oversight in the United
States. This
may be a prudent
starting point, at least
in theory. In practice,
however,
this
hypothesis can wreak
havoc when tested
against the rigors of
an actual deal. The
recently
enacted
Kenneth H. Brown
chapter 15, 11 U.S.C.
§§1501-1532, and the relative scarcity of
judicial guidance from published court
decisions have not clarified this
commonly misunderstood area of
bankruptcy law.
To bring some clarity to this area, the
Bankruptcy Appellate Panel for the Ninth
Circuit Court of Appeals (BAP), in the
first published appellate decision
containing an extensive discussion on
chapter 15, held that the foreign trustee
of a Japanese debtor could exercise his
authority over the foreign debtor’s
1 The authors represented the appellees (i.e., the Japanese bankruptcy
trustee and the management of the Hawaii-based hotel companies) in
this matter. Statements contained or opinions expressed in this article
are the authors’ only and should not in any way be attributed to any of
the courts’ legal or factual findings or the litigants’ positions with
respect to the proceedings mentioned in this article.
About the Authors
Kenneth Brown is a partner at Pachulski
Stang Zeihl & Jones specializing in
complex commercial and bankruptcy
litigation. Barry Sullivan is a partner at
Bickerton Lee Dang & Sullivan in
Honolulu, where he represents some of
Hawaii’s largest hotel, resort and
commercial landowners regarding
ongoing operations, joint ventures,
lease negotiations, debt workouts and
development. Leonard Budyonny is an
attorney at Bickerton Lee Dang &
Sullivan in Honolulu, where his practice
focuses primarily on restructuring and
commercial bankruptcy matters.
Hawaiian assets without authorization
from a U.S. court.2 The BAP’s Iida
decision is significant for participants in
distressed cross-border deals—from
principal investors to professionals
in the international markets—precisely
those facets of international commerce
that chapter 15 is tailored to protect and
facilitate.
In August 2004, Katsumi Iida, a Japanese businessman who pioneered computerized trading of commodity futures in
Japan and, as late as
2003,
controlled
Tokyo General, one
of
the
largest
Japanese commodity
trading firms, was
declared bankrupt
under article 126 of
the Bankruptcy Law
of Japan. Iida’s
Leonard A. Budyonny
failure
largely
resulted from his attempts to diversify
away from his core expertise in
commodity futures. His ill-timed
investments were spread across
businesses ranging from a hamburger
stand to a theme park in China to luxury
Feature
advising creditors, purchasers of
distressed assets or other interested
parties. At least for the developed
economies with established bankruptcy
regimes, the judicial philosophy
underlying the Iida opinion should be
welcome news. Any other result could
have a negative impact on international
capital flow and liquidity, and reduce
predictability and asset pricing uniformity
2 Iida v. Kitahara (In re Iida), 377 B.R. 243 (BAP 9th Cir. 2007), appealed
from the U.S. Bankruptcy Court for the District of Hawaii (Hon. Robert J.
Faris). The BAP’s Iida decision was further appealed to the Ninth Circuit
Court of Appeals. The authors acknowledge an earlier bankruptcy court
decision on chapter 15 appealed to the District Court for the Southern
District of New York and decided on July 5, 2007, Stride v. Official
Comm. (In re SPinX Ltd.), 371 B.R. 10. The focus of the SPinX decision,
however, was narrow and centered primarily on the issue of a statutory
presumption of the debtor’s “center of main interests.” See also In re
Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd.,
Case No. 07-12383, 2007 WL 5479483 (Bankr. S.D.N.Y. Aug. 30,
2007), amended and superceded, 374 B.R. 122 (Bankr. S.D.N.Y. 2007).
Both SPinX and Bear Stearns are mentioned in the BAP’s opinion.
hotels in Hawaii. Tokyo General’s
collapse was also precipitated by its
continued lack of regulatory compliance.
When uncovered by
the regulators, Tokyo
General’s trading
practices were rife
with
improper
discretionary trades,
violations
of
customer
fundsegregation rules,
and false financial
Barry A. Sullivan
statements. Tokyo
General was shut down, and Katsumi Iida
ended up—albeit briefly—in jail.
At the onset of Iida’s bankruptcy,
control over his estate, including the
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Kahala Mandarin luxury hotel in
Honolulu and Kona Village Resort in
Kona, passed to a bankruptcy trustee in
Tokyo. This “revesting” of ownership
was triggered entirely by the provisions
of the Japanese bankruptcy laws. The
trustee, in essence, became the sole legal
owner of the assets comprising the Iida
estate worldwide. Importantly, the
Hawaiian hotels, with management also
in Hawaii, were not part of the
bankruptcy proceedings in Japan, and Iida
himself did not commence any
bankruptcy proceedings in the United
States that would place his U.S. assets
under the jurisdiction of a U.S.
bankruptcy court. Additionally, Iida’s
estate had no creditors in the United
States; all were located in Japan.
While the Iida proceedings were
unfolding in Japan, the Kahala Mandarin
hotel and Kona Village Resort were sold.
After the Japanese bankruptcy trustee was
appointed in 2004, he sought—and
received—at various times the Japanese
bankruptcy court’s explicit approval to
exercise control over Iida’s assets located
in the United States. As a prerequisite to
the trustee’s ability to administer Iida’s
assets in the United States, the Japanese
bankruptcy trustee caused Iida, his son
and his close business associates to be
removed as directors and officers of the
hotel holding corporations, in compliance
with Hawaii law and the corporate
bylaws. Under the bylaws, the removal
was proper so long as the majority of the
shareholders then entitled to vote
approved it. Under Hawaii corporate law,
the corporations were authorized to
accept the vote or consent of a “trustee in
bankruptcy” in his capacity as the trustee
for the sole shareholder.
When the Japanese bankruptcy
trustee eventually sought to repatriate the
sale proceeds for distribution to Iida’s
creditors in Japan, Iida resisted. Nearly
two years after the Japanese bankruptcy
trustee assumed his role as the sole legal
administrator of the Iida estate, Iida sued
the trustee in a Hawaii state court. The
key issue raised by Iida’s lawsuit was
whether the Japanese bankruptcy trustee
had properly exercised his control over
the U.S. companies without seeking
approval or intervention from a court in
the United States. Iida also sought to be
reinstated as the hotel holding companies’
de jure director and officer.
Faced with this challenge to his
authority to administer the Hawaiian
assets of the Iida estate, in June 2006 the
Japanese bankruptcy trustee filed a
chapter 15 petition in the U.S.
Bankruptcy Court for the District of
Hawaii seeking recognition of Iida’s
Japanese bankruptcy as a foreign main
proceeding in the United States. The
chapter 15 proceeding was filed for the
sole purpose of enabling the Japanese
bankruptcy trustee to remove Iida’s state
court action to the Hawaii bankruptcy
court. This was the first chapter 15
petition in the District of Hawaii, and was
one of the earlier petitions for recognition
filed in the United States. Iida contested
the chapter 15 filing in part on the
grounds that it violated U.S. public
policies. The bankruptcy court rejected
his argument and granted the chapter 15
petition for recognition.
As planned, the trustee then removed
the state court action to the Hawaii
bankruptcy court and thereafter moved
for dismissal of Iida’s complaint. In
support of dismissal, the trustee argued
that Iida was attempting to circumvent his
authority as the Japanese bankruptcy
trustee to liquidate the Iida estate’s assets
under the clear-cut mandate of Japanese
bankruptcy laws and the orders of the
Japanese court administering the Iida
bankruptcy. Moreover, the trustee argued
that his prerogative to exercise control
over the Hawaiian companies as their sole
shareholder was not limited by state or
federal law. In response, Iida once again
complained that there was no judicial
recognition in the United States of the
Japanese bankruptcy trustee’s actions
taken with respect to the Hawaiian
companies. The bankruptcy court agreed
with the trustee and granted his motion
for dismissal, treating the motion as one
for summary judgment. Iida then took his
case to the BAP.
The question on appeal, as framed
by the BAP, was whether the Japanese
bankruptcy trustee had to “obtain
permission from a court in the United
States before exercising shareholder
rights to vote to remove and replace
directors and officers” of the Hawaii
corporations. Iida, 377 B.R. at 252-53.
The BAP unanimously answered that
question in the negative. In reaching that
decision, the BAP analyzed the historical
evolution of American legislation on
domestic recognition of foreign
bankruptcies, including §304 of the
Bankruptcy Code, 11 U.S.C. §304, the
statutory predecessor to chapter 15, as
well as the history and purpose of
chapter 15.
Iida made three arguments on
appeal. First, the Japanese bankruptcy
laws stop at the borders of Japan and
have no extraterritorial application in
the United States. Second, chapter 15
and §304 are mandatory and required
the Japanese bankruptcy trustee file a
petition for recognition of the Japanese
bankruptcy proceeding in a U.S. court
before he could exercise control over
the governance of the Hawaiian
corporations. Third, the definition of a
“trustee in bankruptcy” under Hawaii
corporate law did not extend to a
foreign bankruptcy trustee and
therefore, there was no authority under
Hawaii law that permitted the Japanese
bankruptcy trustee to vote Iida’s shares
to effect the removal and replacement
of officers and directors of the
Hawaiian corporations. The last
argument was easily dispensed with by
the BAP because there was simply no
case law or legislative history that
would support a statutory construction
necessarily limiting the phrase “trustee
in bankruptcy” to a domestic, and not a
foreign, trustee.
More significantly, the BAP rejected
Iida’s contentions based on the longstanding doctrine of international comity
and the legislative purpose behind both
§304 and chapter 15. With respect to
chapter 15 in particular, the BAP stated
that it was enacted as a “fundamentally
procedural” statute and “did not constitute
a change in the basic approach of U.S.
law, which...has long been one of
honoring principles of comity.” Iida, 377
B.R. at 256. Fundamentally, chapter 15,
as did §304 before it, gives a foreign
representative or trustee of a foreign
debtor certain rights to administer, with
the assistance of a U.S. bankruptcy court
if necessary, the assets of a foreign debtor
located in the United States. The foreign
representative, however, need not seek
the imprimatur of a federal bankruptcy
tribunal in the United States before taking
legally permissible actions with respect
to assets in the United States. As the BAP
noted: “Nothing in the statute requires
prior judicial permission for acts that do
not implicate matters of comity or
cooperation by courts.” Id. at 258.
Chapter 15 does not restrain a foreign
trustee or representative from discharging
his duties in the United States, so long as
those duties do not violate the public
policy of the United States and do not
require “judicial assistance.” Id. The
difference between the permissive and
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mandatory nature of the statute is critical.
The BAP’s decision in Iida underscores
that the permissive nature of old §304 has
carried over to chapter 15.
Iida, of course, dealt with a
Japanese bankruptcy case, which bears
close resemblance to a chapter 7
liquidation in the United States. The
BAP explicitly acknowledged this
similarity. 377 B.R. at 247 n.2.
Although the BAP’s reasoning did not
require it to expressly extend comity to
the orders of the Japanese court, the
principles of international comity
played an important role in the
decision.3 The BAP was also aware of
prior U.S. case law finding many
parallels between the Japanese and
U.S. bankruptcy laws. Perhaps an
undeveloped or under-developed
foreign bankruptcy regime might have
led the BAP to a different conclusion.
Accordingly, Iida, because it implicates
a U.S. court’s interpretation of the
Japanese bankruptcy laws, is of direct
import for all participants in crossborder restructuring deals involving the
U.S.-based or Japanese assets, and
should be carefully studied by those
advising foreign investors committing
capital in these countries.
On a broader level, the Iida opinion
properly construes chapter 15 as
supportive of the global exchange of
capital and international commerce.
While the BAP did not specifically
address the subject of international
commerce in Iida, it is a reasonable
assumption that underlying its decision
was the principle that no impediments
should exist to prevent a foreign
representative from exercising any and
all rights of an insolvent entity upon
the corporate governance of a domestic
corporation, as long as the public
policies of the United States are not
manifestly violated and applicable state
law is complied with. Presumably, the
same principle should apply in Japan
or any foreign country, allowing a
trustee or debtor-in-possession in a
bankruptcy case pending in the United
States to participate in the corporate
governance of a foreign corporation,
without the necessity of obtaining
judicial assistance in the foreign
country.
The irony, of course, is that Iida’s
arguments—made on behalf of a onceprolific Japanese business visionary
with investment portfolios spread
among different asset classes in several
countries throughout the world—
would, if accepted, curtail the authority
of a foreign representative outside
Japan and contravene the purpose not
only of chapter 15, but also undercut
one of the cardinal elements of the
Model Law on Cross-Border Insolvency promulgated by UNCITRAL—
namely, to encourage “greater legal
certainty” in international trade and
investment. The BAP’s opinion in Iida
underscores this principle, and the
lessons learned from it are clear: A
foreign bankruptcy trustee administering assets in the United States is
not a stranger in paradise or, for that
matter, to the framework of international comity. Chapter 15 is there for
his benefit and is not an impediment to
his authority over the affairs of a
foreign debtor. n
Reprinted with permission from the ABI Journal,
Vol. XXVII, No. 3 April 2008.
The American Bankruptcy Institute is a multidisciplinary, nonpartisan organization
devoted to bankruptcy issues. ABI has more
than 11,500 members, representing all
facets of the insolvency field. For more
information, visit ABI World at
www.abiworld.org.
3 The bankruptcy court, whose ruling Iida appealed to the BAP, expressly
extended comity to the orders of the Japanese court in granting
summary judgment against Iida.
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